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Daily Newsletter, Monday, 06/03/2002

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Monday 06-03-2002
Copyright 2001, All rights reserved. 1 of 2
Redistribution in any form strictly prohibited.
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
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06-03-2002 High Low Volume Advance/Decline
DJIA 9709.79 -215.46 9986.49 9704.18 1.31 bln 877/2344
NASDAQ 1562.56 - 53.17 1621.50 1561.17 1.62 bln 896/2583
S&P 100 514.74 - 14.46 531.45 514.08 Totals 1773/4932
S&P 500 1040.68 - 26.46 1070.74 11039.90
RUS 2000 474.39 - 13.08 487.59 474.23
DJ TRANS 2689.83 - 59.43 2749.19 2689.54
VIX 25.28 + 2.48 25.35 22.51
VXN 47.71 + 1.76 47.71 45.85
TRIN 2.69
PUT/CALL 0.93
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Carpe' Dementia
By Buzz Lynn
buzz@OptionInvestor.com
Seize the Dennis - Koslowski, that is. Seems the board of Tyco
(TYC) booted Mr. Kozlowski over the weekend for a supposed
simmering pot of tax evasion. That was the headline.
Rant on:
I obviously don't know the full scope of the insider knowledge
that led to the firing. But as news trickled out later in the
day, I discovered this: Mr. K is being hounded by the state of
New York for Sales Tax evasion related to the purchase of some
expensive art. Perhaps an on-line auction purchase? Maybe that
will stick and maybe it won't. But two things stick out to me
here that really ignite my rockets, both of them tax related.
First, avoiding sales tax is not a sin. Furthermore I have a chip
on my shoulder against states that would actively send agents
across state lines to New Jersey to photograph New York license
plates in New Jersey shopping malls with the idea of tracking down
the vehicle owners in an attempt to shake down the sales tax that
"WOULD HAVE OTHERWISE BEEN DUE IN NEW YORK". Think I'm kidding?
New York made this a practice as recently as five years ago and
may, although I am unaware if the practice has been stopped, still
be hounding New York residence for sales tax on purchases made in
New Jersey. Kozlowski is a high-profile target with plenty of $$$
to pay if he loses this battle. Plus, it will have bigger
implications for New York residents shopping out of state.
Second, that charge was that the art purchases were made through a
series of family trusts. The misuse of trusts for the purpose of
tax evasion is not a good thing. If Kozlowski has instead misused
his trusts to EVADE taxes (rather than avoid), you can bet that
the US government through the Justice Department, IRS, and
Congressional hearing will give trusts a full proctologic exam in
coming months as details of the art transactions come to light.
That spells bad news and potential regulation and legislation of
all trusts, most of which are supposed to theoretically
impenetrable in court, unlike a corporation where the corporate
veil is easily pierced to expose the individual to liability
despite the intent of a protective entity.
The idea is that as a Trustee of a trust, you have a fiduciary
responsibility to act in the best interest of the trust. To date,
that means keeping your mouth shut about what assets the trust
owns and how those assets are managed. It's a great shield for
frivolous lawsuits and asset protection. But high profile
investigations into misuse may open up other trust users to
incredible scrutiny. To those who use them, better get your ducks
in a row, as trusts may come under increasing attack. You've been
warned.
Hopefully, individual members of Congress will remember what has
covered their personal assets through the years. Politicians
don't use too many corporations in estate planning because trusts
are safer from attack. They use them for good reason. That will
be the only thing that prevents severe scrutiny.
Now I ask those who baled out of TYC today in panic mode, what
does personal sales tax avoidance through trusts have to do with
TYC's stock price? Nothing. But that's the nature of a bear
market. TYC's board apparently didn't want TYC to painted with
the "tax evasion" brush. I can't blame them given the current
state of distrust from investors toward management. Sad but true,
tax evasion was a scapegoat for a jittery board with Kozlowski
creating a potential investor confidence liability. The Enron
debacle may have turned out differently if the board had given top
management brass the boot instead of letting them steer the ship
aground.
Rant off.
Had enough? Sorry there's more, but I'll keep it to bullet
points.
El Paso Energy's treasurer committed suicide over the weekend,
which caused investors to send EP's stock price into a nosedive in
anticipation that EP would suffer the same as ENE.
Williams Companies (WMB) got tarred and feathered in the same
group as the New York Times ran an article over the weekend
alleging from a former employee that WMB participated in energy
price manipulation during California's blackouts last year.
I might add that John Templeton, an outstanding 80+ yr. old
student of value who sold his mutual fund empire to Franklin a few
years back, reveals in his interview with Maria tonight on CNBC
that the U.S. equity market is overvalued by approximately double,
that he sees no decent values anywhere in the world, and that we
would be better off in bonds in stable economies. He omitted the
United States, but specifically mentioned Canada, New Zealand, and
Australia as such a place. Why? I have a hunch, but perhaps I'm
wrong
For readers who live in these parts of the world, I'd be curious
to know and would be glad to share the answers with all in the
next column, are your countries' currencies backed by a gold
standard? Enquiring minds want to know! Thanks in advance for
any who respond.
Let's get on with the charts since they tell the real story. Let
me remind our faithful readers that this is a bear market. There
usually are few big crashes. Instead, the process is a slow bleed
with a series of lower highs and lower lows. A friend sends me
snippets of Richard Russell, a grizzled market veteran and
publisher of the Dow Theory Letters. I like this explanation of
his that I received last Friday:
"A bull market wants to advance while taking the fewest investors
along with it. To do that the bull includes many frightening
sinking spells, reactions, scary intervening declines, and
periodic scary news. Since most investors are focused on the
daily and even the secondary movements, the main or primary trend
tends to be obscured.
By the same token, the bear wants to take stocks down while
keeping the largest number of investors along for the downside
ride. To do this the bear inserts many rallies, one-day upward
explosions, and occasional powerful secondary (upward) corrections
-- with frequent portions of hope."
The latter, hope-raising uptick is what happened last Friday.
Obviously today was back to reality.
Dow Industrial chart - INDU (weekly/daily/60):
I won't spend much time on these because we all get the picture.
9800 support as broken and the next stop looks to be at current
levels around 9700. But as the weekly chart suggests, 9500 is
possible. 60-min chart however should get us a technical bounce
for call traders gone nuts - gunslingers only.
NASDAQ chart - COMPX (weekly/daily/60):
Once the S&P went south, NASDAQ followed to close at its lowest
level this year. No surprise given the profitless, and overvalued
state of tech stocks. However, the index is at current support on
a daily and 60-min chart, which could yield a technical bounce
from oversold. Long term, NASDAQ is the bears' lair, but I'd be
looking for a bounce here - again, gunslingers only.
S&P 500 chart - SPX (weekly/daily/60):
What traders saw in the magic of 1042 I'll never know. Looks like
support at 1050 was a key level to me. At 1040, the SPX is in no-
man's land waiting for the winds to carry it compliantly in any
direction of its choice. Support is gone with next level under
1000. I hate to sound like a pessimist, so let me add that it's
ripe for a technical bounce (broken record: gunslingers only), but
the primary trend is down.
Volume is anemic compared to yesteryear. U.S. buyers are on
strike and rightfully question why they should cast more money at
what is proving to be a losing proposition. Not to be out done,
foreign money is also questioning why it should remain in our
markets with such lackluster performance, not to mention the
specter of fiat money printed at a reckless pace on these shores.
To keep dollars patriated, the Fed's most likely course of action
is to raise rates, which would make dollars look good in terms of
return compared to other currencies. The other edge of the sword
is that higher rates would cost business immeasurable increases in
debt repayment thus depressing profits further. To the Fed: pick
your poison. To investors: don't drink hemlock.
VIX, VXN, who cares? It's topping out at resistance of roughly 26
currently and is due to fall back if oscillators hold their
pattern.
Oh yeah, almost forgot to mention. . .car sales are down, but
construction actually rose compared a fractional anticipated loss.
Mixed picture here, but I tend to take government statistics with
a grain of salt since the government practically invented and
legitimized off balance sheet and pro-forma numbers. In short, I
don’t' trust them.
What for tomorrow? Not much to read into or interpret. Perhaps a
technical bounce from the oversold stochastic indicators on the
daily and shorter time frame charts. But the weekly down-turned
stochastic coupled with a support break on the SPX does not change
my generally bearish outlook for now. Gunsling for small profits
with risk capital only on bullish moves if you must. But the
long-term trend I with the bears and like will be, albeit with
bullish headfakes from time to time, over the next few years.
I'll be viewing bounces as just another opportunity to go short
and profit in much the same way as we used to view dips a buying
opportunity.
See you at the bell.
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INDEX TRADER SUMMARY
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EXTREMES
by Leigh Stevens
TRADING ACTIVITY AND OUTLOOK -
The market continues to switch roles and "lag" the economy. My
particular theory is that bull and bear market cycles will tend
to go from extreme to opposite extreme. The "excess" at the
tech/Nasdaq "party" ending in 2000, left a BIG hangover.
Moreover, the market has a tendency to follow one extreme by
another. In this (market) cycle, our collective wiser investor
has sworn off all but the most "sensible" (stock) valuations. If
P/E multiples are P/valstill not reasonable, then buyers are NOT
going to buy them - no way, no how. We're being cautious in the
extreme.
A NOTE ON METHODOLOGY -
Technical analysis, the way I see it and practice it is not
somehow devoid of the "fundamental" back drop or the stream of
fundamental events that "cause" the market to move one way or
another. Rather, technical analysis is good at highlighting the
"true" or objective fundamentals of the market. For example, the
market has a mechanism sum of all participants knowledge and
disposition often senses trouble (or good times) ahead. The
prolonged downtrend in the weekly SPX chart was certainly
highlighting all the earnings and political problems we have been
seeing in the past weeks.
You'll note that in my Index trader summary, I do not go into the
"news" of the day, as that is covered quite well in the Option
Investor end of day market summary. Moreover, my time is spent
about 80/20. 80% of my analysis work stems from analyzing and
marking up the charts so that they can tell you a "story" and you
can take in that story visually - which is in fact the way that
we assimilate information in the most efficient manner. 20% of
what I do is write up the analysis or market "wisdom" contained
in the chart patterns and indicators. If I err, it is not the
"fault" of the patterns and indicators, only my interpretation of
them, at least 90% or 95% of the time.
S&P 500 (SPX) Weekly/Daily charts:
If SPX sinks much lower, the potential Head & Shoulder's bottom
that I outlined on the weekly chart will not be a possible
interpretation much longer. Normally, the pattern for the "right
shoulder" will be somewhat symmetrical. If SPX sinks much lower,
certainly to under 1000, then what replaces the possible chart
outlook? - the possibility that SPX re-tests its September low.
I don't think this currently, but as noted this morning in the
Wall Street Journal, we already have some one fifth of all S&P
500 stocks trading under their September lows.
The daily chart lower envelope gives an idea of a possible
downside target (in blue - 1028) if the index remains under sell
pressure this week. This would be a "normal" volatility or range
for SPX. NOTE also that the daily stochastic model is NOT yet at
a fully oversold reading.
S&P 500 (SPX) Hourly chart:
The "minimum" downside objective implied by the Head & Shoulders
top pattern ahs been fulfilled, so I left the analysis and
description relating to this potential outcome on the hourly SPX
chart above. This business of an implied objective is only a
possible MINIMUM and the downside move can certainly continue.
However, very often such a measure of an objective results in a
price area where a significant part or most of the move will be
captured. Certainly, covering at the close resulted in a nice
gain from the area of the recent upswing high at 1080 - a
reversal right from the hourly down trendline - connecting 1106
and 1097 results in a straight line that intersects 1080.
S&P 100 (OEX) Weekly/Daily charts:
OEX could get to the 508-510 area before it would bounce off
support implied by the lower (daily chart) envelope band or the
low end of the weekly downtrend channel. That may be but I would
expect a rally attempt to set up by tomorrow -- if that was after
further weakness that took OEX into this area (508-510), then I
would not only cover shorts/exit puts, but would turn buyer for a
trade, risking to 505. Stay tuned!
S&P 100 (OEX) Hourly chart:
Not much more to say than what the realization or outcome of
today's action was relative to my expectations that there would
be a move down to at least 520. OEX is now fully oversold on an
hourly basis, nearly so (but not quite) in terms of the daily
(14-day) stochastic on the chart prior to the hourly one above.
Dow 1/100 Index (QQQ) Hourly chart:
The Dow, which has not been seeing the volatility of the
capitalization weighted S&P indices and reflecting the "bluest"
of blue chips, is already at the low end of its hourly chart
downtrend channel. I think, we're due for a rebound in the DJX.
However, I should also note that the Dow has pierced its 200-day
moving average (not shown) - this will turn the institutional
crowd bearish - they don't follow many technical indicators, but
this is one of them. In terms of DJX, the 200-day average is at
98.87. We can assume that this level may now be an area of
resistance, which is also not far under the current upper end of
the downtrend channel outlined on the DJX hourly chart above.
Nasdaq Composite ($COMP.X) Weekly/Daily charts:
If the Nasdaq retraces MORE than 75% of the Sept - Jan upswing,
which it is in danger of doing, than there is an increasing
likelihood of what I call a "round trip" or a full 100%
retracement; i.e., back to the September bottom.
The daily chart envelope line that has been "containing" most of
the declines, comes in at 1531. The Composite is now almost
fully oversold in terms of the 14-day stochastic.
Nasdaq Composite ($COMP.X) Hourly chart:
COMP is also now back at the low end of the lower trendline at
the bottom of the downtrend channel, which comes in around 1555-
1152, per the downward progression of the line over the coming
trading hours tomorrow. 1560 is an important level to watch, as
it was where COMP bottomed in early-May.
Nasdaq 100 Trust Stock (QQQ) Daily chart:
If I expand the lower envelope line to 12% from 9% (under the 21-
day moving average), it reflects the area (in percent terms)
where the Q's bottomed in early-May. I often find that the a
similar extreme will follow the last extreme. The 12% "band"
comes in at 27.3 not far from the 27.5 QQQ downside objective I
indicated as a possible objective based on the hourly chart Head
& Shoulders pattern described below.
Nasdaq 100 Trust Stock (QQQ) Hourly chart:
The implied H&S downside objective is 27.5. However, 28.4 was
the prior (early-May) relative low and may provide some support –
- as is the case for the low end of the hourly downtrend channel.
The objectives implied by a H&S pattern sometimes work out
exactly, whereas sometimes the actual new low is less than that.
I would cover short positions on any further weakness tomorrow,
and watch the 28.5 area, if reached, for signs of a turnaround in
the Nasdaq 100. Those who cannot watch the intraday action, or
even ones who can, I suggest maintaining a 30.5 stop or exit
point for shorts. Cover short positions and trade from the long
side (for traders) on dips to and under 28.0, especially to
27.5-27.7,
MAJOR (GENERAL) MARKET INDICATORS -
CBOE VOLATILITY INDEX (OEX):
The VIX has rallied sharply in the past few days. It is not at
or above 27 which has been associated with a major bottom, but
the recent sharp up swing may be significant for a near-term low.
CBOE CALL TO PUT DAILY VOLUME RATIO - EQUITIES ONLY:
My Call to Put ratio had a 1-day bullish reading last Tuesday
(5/28), and tomorrow is within 5-trading days of that reading.
This may be significant and time will tell, for at least an
interim bottom tomorrow (Tuesday), especially since my SPX and
OEX "minimum" downside objectives have been met. Tuesday and
Thursday are often "reversal" days, with Monday, Wednesday and
Friday often being "continuation" sessions.
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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INDEX TRADER GAME PLANS
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THE SECTOR BEAT - 6/03
by Leigh Stevens
HIGHER ON THE DAY ON Monday -
NOT MUCH! A flight to safety, which was not a big life raft at
all, was evidenced today. Gold and silver traditionally have
played a large role in a "flight to safety" in the Indian
subcontinent and throughout the rest of Asia. Buying from this
area is a noteworthy aspect of the continued demand for precious
metals.
DOWN ON THE DAY on Monday -
LOT OF RED INK TODAY!
All tech sectors suffered severe losses, spearheaded by the
semiconductor and software sectors. The broader market saw the
most intense selling in the oil service, utility, natural gas,
brokerage, biotech and airline issues. Only gold stocks of course
were higher on the day as the ultimate gloom and doom hedge.
Tech, tech and more tech are the ones in the red today, except
for the oil/natural gas sector and the airlines, which can't seem
to win for losing.
SECTOR HIGHLIGHT OF THE DAY -
Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI;
MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX
The Semiconductor Index ($SOX.X) was the major story of the day,
as chip bellwether Intel (INTC) was down 3.6% on the day, ahead
of its mid-quarter update, due out after the close Thursday. Some
talk was making the rounds that the company would narrow its
revenue targets. INTC earnings are expected to be in the range
of 14 to 16 cents in Q2.
SOX's importance as a "bellwether" for the Nasdaq cannot be
overestimated and today, the Index went not only to a new
intraday low, but a new closing low as well for the year.
Moreover, its close right on the low does not bode well for
tomorrow's trading, as there may wall be follow through selling
on Tuesday.
Potentially, now that the early-May bottom and the low for the
year to day, has been penetrated, we have to look at the
possibility for an eventual move back down to the area of the
September bottom.
The only potential bullish positive is that, while the Index has
gone to a new low, the daily stochastic on the longest setting
(length: 21) I use, is not as oversold as at the previous bottom,
which sets up the possibility of a bullish price/oscillator
divergence. Time will tell on this.
Meanwhile, the SOX is not looking healthy on an overall technical
basis as the new low could signal the start of a new down leg.
INDIVIDUAL SECTOR UPDATES TOMORROW, IN THE HANDFUL OF CASES WHERE
THERE IS SOMETHING NEW TO SAY; E.G., NEW LOWS, ETC. OR WHERE A
SECTOR HAS NOT BEEN ANALYZED YET....
SECTOR REVIEW -
Airline Index ($XAL.X)
STOCKS: ALK; AMR; AWA; CAL; DAL; FRNT; KLM; LUV; NWAC; U; UAL
Still in a downtrend, well under its 50 and 200-day moving
averages.
Sector would not break out above its major down trendline before
89. Support has developed in the last month in the 77.00 - 79.00
area. Sector looks like it may be bottoming, but is not yet in a
position to rally much - little buying interest in the group has
shown up as evidenced by the pattern of lower relative lows after
the early-May rebound. LAST UPDATE: 6/02
Amex Composite Index ($XAX.X)
The small cap stocks so predominating in the Amex, as a group,
has been in a sideways consolidation. Recent rally attempts have
been finding resistance in the 964 area. 947-948 looks like a key
near support, with a break under this level suggesting at least a
temporary top. LAST UPDATE: 6/02
Bank Index ($BKX.X)
STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL;
NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION
The bank index has made at least a temporary double top in the
916 area - closing penetration of this prior top, and subsequent
support developing in this area, would suggest a new up leg.
BKK fell under its up trendline this week and its 50-day moving
average. It would need to close back above 889 to reverse this
bearish near-term picture. Significant support lies in low 860
area - no major trend change is signaled without a move to under
this area. LAST UPDATE: 6/02
Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA;
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM;
MYGN; PDLI; TARO; TEVA; VRTX; XOMA
Biotech has been in pronounced downtrend, which may have
reversed at the early-May lows in the 380 area. A continued rally
from this point would suggests that index can work higher as long
as BTK maintains a pattern of higher (up) swing highs and higher
(down) swing lows. This pattern would be broken on a downside
penetration of 393.
A key technical resistance is 449-450, the area of several
prior lows and the intersection of daily down trendline. A close
above 449-450 would indicate that the trend has reversed higher.
Further resistance then comes in at the top of its downtrend
channel at 475.
Suggested buy of Biotech Holdr's (BBH) at 101.50 on 5/24 open;
recommended initial stop/exit point at 92.5; initial objective:
113; longer-term objective: 127, back to area of mid-March highs.
LAST UPDATE: 6/02
Computer Technology Index ($XCI.X)
STOCKS: to be listed
Remains in a downtrend; May rally recently reversed at 50-day
moving average and from an overbought reading on the daily
oscillators; e.g., 4-day RSI. Resistance is at 658, then
682. Close over these levels would turn the trend up.
Early-May lows in the 580 area now looks like major support. XCI
has been continuing to trend lower, from its upswing high in the
680 area. LAST UPDATE: 6/02
Computer Boxmaker Index ($BMX.X)
STOCKS: AAPL; CPQ; DELL; GTW; HWP; IBM; SNE; SUNW; UIS; VRTS
The Boxmaker sector, an unglamorous term for PC manufacturers,
had a mid-May rally right to its down trendline at it's 50-day
moving average, where BMX reversed - this was also area of its
50-day moving average.
Resistance is at 94, then 98. Major support looks like 83-85.
LAST UPDATE: 6/02
Cyclical Index; Morgan Stanley; ($CYC.X)
STOCKS: AA; C; CAT; CSX; DCN; DD; DE; DOW; ETN; F; FDX; GP; GT;
HON; HWP; IP; IR; JCI; KRI; MAS; MMM; MOT; PBI; PD; PPG; PTV; R;
S; UTX; WHR; X
The cyclical index has been locked in a 552-595 trading range
since early- March, with current levels closer to the high end of
this range.
A breakout above 595 on a closing basis, with subsequent ability
to hold this level on pullbacks, would suggest that another up
leg was developing in CYC. A close below 552 would reverse the
trend down. LAST UPDATE: 6/02
Defense Index; Amex ($DFI.X)
STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN;
ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC
The Defense sector, a very strong performer in the January to May
timeframe, formed a May top after repeated failures to get
through resistance in the 680 area - retreat from the top area
was accompanied by the a downside break of the Jan-May up
trendline. The last rally to this area occurred on less relative
strength, forming a classic price/RSI divergence.
Resistance at the previously broken up trendline is at 673
currently, not far under the major 680 resistance. Am watching
to see if the 50-day moving average acts as support beyond today.
Downside possibilities for a pullback in DFI may lie either in
the 615 or 595 areas, representing the 38% and 50% retracements,
respectively. LAST UPDATE: 5/23
Disk Drive Index ($DDX.X)
STOCKS: ADIC; ADPT; DSS; FLSH; HTCH; IOM; MXO; RDRT; SNDK; STK
The disk drive index remains in a downtrend. However, after a
drop to the 82 area in early-May, which completed a 62%
retracement of the September '01 - February '02 advance, DDX
rebounded some. If the index can hold above its prior low at 82,
the index could be a position to rally.
The last rally reversed at its 200-day moving average. A close
above 88, current resistance implied by its down trendline, would
suggest some further rally potential at least back up to re-test
its 200 and 50-day moving averages. LAST UPDATE: 5/26
Fiber Optics Index ($FOP.X)
STOCKS: ADCT; ALA; AMCC; AVNX; CIEN; CORV; CSCO; FNSR; GLW; JDSU;
JNPR; LU; MRVC; NEWP; NT; NUFO; ONIS; PMCS; Q; SCMR; TLAB; VTSS;
WCG
The Fiber Optic group has been in a downtrend since peaking in
the 139 area in early-December. FOP's recent low was made at 65
in early-May and the index is again near that area. A break of
this level would suggest another downswing, but I don't have
enough price history to focus on what might be a possible further
downside objective.
On the upside, a close over 71.00 would put FOP above its down
trendline, basis the daily chart. Sector is again approaching an
oversold reading on the daily oscillators. LAST UPDATE: 5/26
Financial Index; NYSE ($NF.X)
STOCKS: This index is composed of all the financial stocks on the
NYSE; e.g., banks, insurance, etc.
Forest & Paper Products Sector Index ($FPP.X)
Gold & Silver Sector Index ($XAU.X)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL
XAU continues to accelerate to the upside, but may find near
resistance at the top end of its steep uptrend channel at around
90. My longer-term objective is 100 however. Near support looks
like 80, with major support at 70.
If you want to buy into this sector it is high risk, although
gold bullion has a possible per ounce target to $340-345, maybe
350. The question is how much of the potential further price rise
in gold is priced into the XAU stocks already. LAST UPDATE: 5/23
Health Providers Index; Morgan Stanley ($RXH.X)
Healthcare Index; Morgan Stanley ($HMO.X)
STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY;
TGH; THC; UNH; WLP
Healthcare ($HMO.X) rebounded strongly from where it needed to
maintain its bullish technical chart picture, at its up
trendline. However, the prior high in the 644 area now looms as
significant resistance. LAST UPDATE: 6/02
** Previously suggested basket of 3 HMO stocks/calls -
PacifiCare Health Systems (PHSY) at 23.5-24.7. Stop/exit: 23.3
Wellpoint Health Networks (WLP) - Entry at 72.00, then at 70.
Stop/exit point: 65 Additional buy suggested at 66.
Humana (HUM) - Entry suggested at 15.60 & 15.00-15.15. Stop/exit
point: 13.2
High Tech Index; Morgan Stanley ($MSH.X)
Internet Index; CBOE ($INX.X)
Natural Gas Index ($XNG)
Networking Index ($NWX.X)
Oil Index; CBOE ($OIX.X)
Oil Service Sector Index ($OSX.X)
Pharmaceutical Index ($DRG.X)
Retail Index; S&P - CBOE ($RLX.X)
Russell 2000 Index ($RUT.X)
Securities Broker Dealer Index ($XBD.X)
Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI;
MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX
** SEE SECTOR HIGHLIGHT OF THE DAY **
Software Index; Goldman Sachs ($GSO.X)
Telecoms Index; No. American ($XTC.X)
Transportation Average; Dow Jones ($TRAN)
Utility Sector Index ($UTY.X)
Wireless Telecom Sector Index ($YLS.X)
NOTE: RISK to REWARD guidelines -
Determining an objective is important, even if it is a moving
target, as this is the reward potential. Determining reward
potential is critical to establishing whether a stop that makes
“sense” (e.g., a sell stop that was placed under a key support
level) would, if triggered, result in a dollar loss that is in
proportion to profit potential; e.g., 1/3 of it. (On occasion,
when the purchase price of call or put is equal to 1/3 or less of
the estimated reward potential, there may not be a specific exit
suggestion, as the cost of the option is equal to the amount that
is being risked.)
Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com
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The Option Investor Newsletter Monday 06-03-2002
Copyright 2001, All rights reserved. 2 of 2
Redistribution in any form strictly prohibited.
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STOP-LOSS UPDATES
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COHU - put
Adjust from $26 down to $24
DUK - call
Adjust from $34.50 down to $33
GS - call
Adjust from $78 down to $77
PLAB - call
Adjust from $25 down to $24
VRTS - call
Adjust from $24.25 down to $23
WHR - call
Adjust from $74 down to $73
WMB - call
Adjust from $16.50 down to $13.30
*************
DROPPED CALLS
*************
SNPS $48.98 -1.46 (-1.46) No matter how you slice it SNPS was
destined for the drop list tonight. The company is set to
announce earnings tomorrow night after the closing bell, and
we would have wanted to have all positions closed before that
event. But the bears pushed the schedule up a bit by thrashing
the broad market again today and SNPS fell below the $49.50
support level (also the site of our stop), closing right at the
low of the day. Clearly we are dropping coverage tonight. Look
for an oversold bounce in the morning to provide the opportunity
for a more attractive exit point.
************
DROPPED PUTS
************
None
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**********************
PLAY OF THE DAY – CALL
**********************
DGX – Quest Diagnostics $87.40 -0.02 (-0.02 this week)
Quest Diagnostics was the result of a 1996 Corning spinoff,
and currently holds the title of the world's #1 clinical
laboratory. DGX performs more than 100 million routine tests
annually, including cholesterol, HIV, pregnancy, alcohol, and
pap smear tests. Operating laboratories throughout the US and
in Brazil, Mexico, and the UK, DGX also performs esoteric
testing (complex, low-volume tests) and clinical trials. The
company serves doctors, hospitals, HMOs, and other labs as well
as corporations, government agencies, and prisons.
Most Recent Write-Up
Looking across the major sectors of the market in the middle of
the day on Friday it was a sea of green. That picture changed
significantly by the closing bell, with several sectors,
including Health Care (HMO.X) ending with losses for the day.
In light of that environment, it was encouraging to see DGX hang
on to post a fractional gain, albeit a small one. The stock has
been trading well over the past week after finding support near
the $85 level and began rebounding strongly on Thursday
following Moody's upgrade of the company's debt. With bullish
life returning to the Health Care sector, DGX should benefit from
any meaningful move due to the continued strong earnings the
company has been reporting. The ascending trendline that has
been supporting the stock on major pullbacks has now risen to
$84, the site of our stop, and we expect to see it support another
extended bullish move as it rises to meet historical support at
$85. Over the past week, DGX has been building a new ascending
trend, which currently rests at $87. This is interesting given
the fact that the stock has been finding intraday support at that
level over the past 2 days. Another rebound from that level would
make for a decent entry point, as would a dip and rebound near the
$86 level. Keep stops set at $84, which is just below the recent
lows.
Comments
Showing its resilience on Monday in the face of severe weakness
in the broad market, DGX flexed its relative strength muscles and
kept its loss on the day to a mere 2-cents. While that may not
seem like the stuff that featured plays are made of, it is a far
sight better than the performance of any broad market measure
today. DGX held firm at recent support near $86.50 throughout
the day before recovering to close right at the high of the day.
That's pretty good for a day that saw every sector (except for
Gold) close in the red. It looks like intraday dips in this
stock are definitely buyable, as investors are voting with their
wallets that they like the long-term prospects for DGX, despite
the rest of the market withering under the bears' onslaught.
Another rebound from the $86.50 area or a breakout over the $88
level should both make for solid entry points into the play,
particularly if the broad market can reverse its losing ways.
BUY CALL JUN-85*DGX-FQ OI=2523 at $3.90 SL=2.50
BUY CALL JUN-90 DGX-FR OI= 678 at $1.25 SL=0.50
BUY CALL JUL-85 DGX-GQ OI= 50 at $5.30 SL=3.25
BUY CALL JUL-90 DGX-GR OI= 143 at $2.85 SL=1.50
BUY CALL JUL-95 DGX-GS OI= 41 at $1.15 SL=0.50
Average Daily Volume = 883 K
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TRADERS CORNER
**************
Looking For Winning Trades?
by Mark Phillips
mphillips@OptionInvestor.com
Alright, I admit it. I'm a technical analysis junkie and like
many others that fit that description, I have spent countless
hours in pursuit of that magic, faultless indicator that will
deliver winning trade after winning trade. I don't like to be
the bearer of bad news, but in my experience, that dog doesn't
hunt. And believe me, I don't make that statement lightly.
I've tested (and in many cases traded) most of the widely used
indicators, from moving averages and Bollinger bands to various
oscillators and volume-based indicators. I've even created
several proprietary indicators of my own.
Do you know what I've learned? None of these indicators can be
used to generate consistently profitable trades without being
filtered through the most powerful trading tool we all possess,
that of our own judgment and critical decision-making process.
That isn't to say that technical analysis isn't a great tool --
I use it as my primary tool in identifying high-odds trade
candidates. I use a combination of different technical
indicators to run various scans of hundreds of securities on a
daily and weekly basis. But that is the key distinction in my
mind. This automated process just whittles down the universe of
stocks at my disposal, delivering a short list of stocks that
look good for bullish or bearish trades.
That's when the hard work starts, as I begin looking at each
chart individually. I use many of the same indicators as in the
automated scans, but there is something different and extremely
valuable about actually looking at the chart with my own two
eyes. I see nuances in the appearance of the Stochastics
oscillator or price action relative to an important moving average
that is difficult (or impossible) to program into a custom stock
scan. Equally as important is the fact that through all my other
research I will have an almost intuitive feel for whether to
seriously consider trades that are in conflict with the direction
of the overall market or sector. A stock may have what appears to
be a bullish chart, but if I know that the sector is in a bearish
trend, I am unlikely to give that stock serious consideration from
the long side.
Sector analysis and relative strength studies comprise the
cornerstone of my investing strategy, and every trade that I
consider must be confirmed by its sector heading in the same
direction as the trade I am considering. This is the kind of
interactive evaluation that an automated screening process (no
matter how sophisticated) cannot perform for me. In a future
article I want to delve into the topics of sector analysis and
relative strength, but I don't want to do it today because it
requires an article (possibly two) of its own.
Despite all my cautionary statements above, what I really want to
talk about are some of the tools that are available for screening
potential trade candidates. Then in the weeks ahead, we can talk
about how to apply our judgment to that list of candidates to
whittle it down to a short list of actionable trades.
I have used a charting program called Metastock since 1996
because of the extensive customizability it provides. I can
define my own technical indicators or use any of the standard
indicators that come with the software package. Any of these
can be applied to a given chart in any combination and that alone
is powerful. But then I can ask it to deliver a list of stocks
to me that meet my predefined criteria on Stochastics, any given
moving average, various candlestick patterns, or any other
indication that I can dream up. This approach appeals to me
because of my background as an engineer. I love to program
software and then see the results of my efforts. This is clearly
not a solution that will appeal to everyone, especially those
that don't have copious amounts of free time to burn in
programming, back-testing and then re-programming based on those
results.
Fortunately, there are some compelling resources on the Internet
for performing stock scans that in many ways rival the results
of my countless hours of programming. The best part is that the
hard work of defining some very useful stock screens has already
been done, and we can simply take advantage of the work that has
already been done. The best resource I have ever come across
online is at StockCharts.com, which should be familiar to all of
you that follow Jeff Bailey's commentary as it relates to Point
and Figure charts.
Just head on over to the StockCharts homepage
(http://stockcharts.com/index.html) and below the login
information there is a set of links on the left hand side.
Select the Stock Scans link and up comes a list of scans,
already programmed, scanned and compartmentalized by exchange
and by type of indicator. There is a whole section devoted to
standard technical chart pattern recognition, as well as a
section devoted to numerous candlestick patterns. But my
personal favorite is the bottom section, which is devoted to a
healthy dose of Point and Figure chart patterns.
Looking for all the stocks that are giving fresh triple-bottom
sell signals? Stockcharts has done the work for you and all you
have to do is click on the link to display the results of the
scan. After clicking on the link (number in the desired column)
for the PnF chart pattern I am interested in, I get a list of
all the stocks that currently meet that criteria, which I can
sort by Open, High, Low, Close or Volume, by clicking on the
column header. Then I print that list out and start looking at
each of the symbols on a standard price chart, looking for those
that appear close to providing a solid entry point. I fall back
on my standard technical analysis tools to make that
determination, but here I find it is most useful to actually work
with each chart. This is where the lessons of experience help me
to separate the wheat from the chaff.
To recap, I don't think you can program a computer to go off and
find trades for you that can be entered blindly. But using the
superior scanning abilities of the computer can whittle the list
of stocks down to a manageable list, eliminating much of the
tedium of identifying trade candidates.
Take an evening this week and put this scanning tool to the test,
looking at some of the candidates that it delivers. By next week,
you should be familiar with what it can do for us and then we can
really have some fun. For our next visit, I'm going to run a PnF
scan (I'm not sure which one right now), and then walk you
through the process I go through to whittle that list down to a
handful of prospective trade candidates. I'll list a few that I
think look good, along with how I arrived at my conclusions and
the entry criteria I would then look for before taking each of
the trades. Then we can follow it up in a future article and
evaluate the results. That ought to allow us all to see how
useful a simple screening tool can be in helping us along the
path to profits. Doesn't that sound like fun?
As a side note for those of you that want to define your own
custom scans, StockCharts provides that ability as well. It is
only for subscribed users, but for a mere $20 per month, they give
us the ability to write and save our own custom scans, along with
a host of other charting features ideally suited to the
experienced technical analyst. How's that for a shameless plug?
Don't worry, I have no relationship with the site other than to
tell you that I am one very happy customer. Keep in mind that
the basic scans and charts that are available for free are likely
all that most of us will ever need. But it sure is nice to know
that there's room for experimentation, now isn't it? BIG GRIN!!
Have a great week!
Mark
*******************
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would welcome you as a permanent subscriber.
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